Greece Gives the Euro One Last Shot

A supporter of Radical Left party (SYRIZA) sits in front of a graffiti painted wall of Athens' university, where party's main election center is located on Sunday, June 17, 2012. The graffiti on the wall reads "Do not live like slaves , Revolution Now ". Alexis Tsipras and his party shot to prominence in the May 6 vote, where he came a surprise second and quadrupled his support since the 2009 election. Syriza party has vowed to rip up Greece's bailout agreements and repeal the austerity measures, which have included deep spending cuts on everything from health care to education and infrastructure, as well as tax hikes and reductions of salaries and pensions.

It was a night of high drama, after a tense pre-election period that often descended into violence. By the end of it, Greek voters had narrowly given the pro-bailout forces one last stab at salvaging the adjustment program with Greece’s creditors and avoiding a disastrous exit from the euro. This has bought the country some time. It must now make the best possible use of it.

The first step will be the formation of a government as soon as possible. According to the election results, the conservative New Democracy got 29.7 percent of the vote and 129 out of 300 seats in parliament. Along with third-place PASOK (12.3 percent, 33 seats) and the Democratic Left (6.3 percent, 17 seats), the numbers are there to set up a coalition government with a strong majority and a clear mandate to renegotiate some elements of the bailout program. SYRIZA, the surging hard-left party which garnered an unprecedented 26.9 percent of the vote on an aggressive anti-bailout platform, has already made it clear that it will not participate in any coalition led by New Democracy and will focus instead on its new role as the official opposition.

Two sticking points that remained at the time of writing were the willingness of PASOK to participate in the government and rumblings, in particular from the Democratic Left, about the suitability of Antonis Samaras, head of New Democracy, for the post of prime minister. The socialist PASOK, which has governed Greece for most of the past thirty years and under whose watch the country had to be rescued by the eurozone and the International Monetary Fund, has seen its support collapse by nearly three-quarters in less than three years, from 44 percent in 2009 to less than 13 percent on Sunday. There are those within the party who argue that a break from government is needed so that PASOK can recover and rebuild its ties with voters.

A stable, pro-reform government is a necessary condition if the Greek program is to succeed. But it will have little chance to make headway and earn the trust of the Greek public if the program itself is not amended. The German government, which until Saturday was rigid in its rejection of any kind of renegotiation, sent signals of its newfound flexibility last night. Immediately after the results became clear, Wolfgang Schauble, Germany’s hawkish finance minister, released a statement highlighting the need for “political stability” in order for the program to succeed; he mentioned that the troika of Greece’s official lenders “will consult with the authorities in order to assess the program’s implementation, form a view about the current situation, and work towards making the adjustment program succeed.” Earlier, foreign minister Guido Westerwelle had gone further, saying that Germany would not abide by a breach of Grecce’s prior commitments but could countenance a reassessment of the timeframe of fiscal adjustment.

That is a good start, but it will not be enough. The troika will need to own up to its mistakes in designing the bailout program and make amendments. For example, its insistence on successive indirect tax increases undermined the efforts at an internal devaluation, destroyed real incomes and, by choking off demand, actually failed to increase state revenues. In addition, the push to lower wages in the private sector as part of the second bailout agreement has inflicted major damage on economic activity, more than offsetting any benefits in terms of increased wage competitiveness.

Ultimately, though, Greece’s capacity to recover and remain in the eurozone will depend on its own efforts. The new government must avail itself of the breathing space that will be offered to finally get serious about the structural reforms that matter most for the economy’s prospects. These most pressingly include the reorganization of the tax service (and tax justice) so that it can successfully clamp down on rampant tax evasion, the radical simplification of bureaucratic procedures related to investing and starting a business, the expedited introduction of competition and removal of burdensome regulation in the closed professions and further measures to improve the monitoring of spending in the public sector. This is Greece’s last chance to bring its public administration into line with European standards.